* Cabinet to study draft law on renewable reform due April 8 (Adds detail, background)

BERLIN, March 24 (Reuters) - Germany’s economy and energy minister said industrial firms would not have to pay renewable energy surcharges for existing on-site power plants, retreating from an initial proposal that would have cost them around 500 million euros ($689 million) a year.

Under Minister Sigmar Gabriel’s initial proposal to reform Germany’s Renewable Energy Law (EEG), companies including chemical maker BASF and steelmaker Salzgitter AG could have been faced with paying as much as 90 percent of the surcharge, currently 6.24 cents per kilowatt-hour, on power produced by their own plants.

Gabriel told reporters on Monday that states run by the Social Democrats (SPD) had wanted the exemption for existing on-site plants and that he would take the proposal into cabinet consultations.

The exemption would also allow for modernisations and upgrades of existing plants.

The initial plan would have cost companies some 500 million euros ($689.1 million) a year, according to industry estimates.

Salzgitter had calculated it would have to pay an additional 75 million euros a year.

BASF and Bayer also said their power plants would not be viable if the charges were levied.

Companies’ on-site installations produce 50 terawatt hours a year (TWh), 25 percent of the power consumed by industry, to avoid paying some of the 24 billion euros in annual renewable energy subsidies that fall the heaviest on households.

Gabriel said he was optimistic that Germany would be able to reach an agreement with the European Commission by the end of March or start of April on renewable energy state aid proceedings over disputed exemptions to green charges that Berlin grants heavy industry.

Shifting Europe’s biggest economy to energy from the sun and wind and away from nuclear and fossil fuels is a top priority of Merkel’s new coalition government.

Gabriel said his draft law on EEG reform was due to be adopted by the German cabinet on April 8.